PPP-reits column: looking forward to the development and innovation of infrastructure investment and financing after REIT

Source: REITs industry research

Nearly half of 2020 has passed, and the new epidemic has had a significant impact on China's economy. In the first quarter, China's economy showed negative growth, and infrastructure, real estate, manufacturing and other industries, which play a greater role in driving the national economy, have been greatly affected, and some of them are nearly stagnant. Facing the uncertainty of the global epidemic situation, this year's NPC and CPPCC work reports have proposed that there is no specific target for economic growth. This is the fourth time that China has not set a growth target in the government work report, which shows the great impact.

With the decline of epidemic prevention risk level, the pace of economic recovery and construction began to focus slowly, and the silent market finally gradually came back to life. Different from the four trillion strong landing in 2008, this economic regulation emphasizes six stabilities and six guarantees, pays attention to sustainable development, quality and efficiency, and does not engage in quantitative easing and flood irrigation. As a pillar industry of the national economy for a long time, the infrastructure industry has once again attracted the attention of all sectors of society with the introduction of heavy policies such as new infrastructure and infrastructure REITs.

Based on this, this paper takes the policy logic in recent years as the foothold, takes into account the domestic and foreign comparison, analyzes the current situation of investment and financing in China's infrastructure market, shares with readers, throws a brick to attract jade, promotes exchange and thinking, so as to better apply policies and promote infrastructure and economic development.

01

The history of infrastructure investment and financing in China and its comparison at home and abroad

（1） China Perspective

The evolution of China's infrastructure investment and financing policy is closely related to the change of China's fiscal policy, which can be roughly divided into five stages [1].

The first stage: before 1993, the central government and local governments took the lead in issuing treasury bonds and bank loans for investment and financing. At this stage, China has a double gap of foreign exchange and savings, lacking both capital and technology, and began to introduce foreign capital to pilot BOT mode.

The second stage: from 1994 to 2002, with the reform of tax sharing system as the node, the financial power of local governments was shifted up and their powers were transferred downward. At the same time, local financing platforms began to sprout to finance the infrastructure construction of local governments. At the same time, in the face of the serious lag of infrastructure such as roads, docks and power plants, the Chinese government promulgated the foreign investment clause To promote the implementation of BOT projects in a planned way from the national level.

The third stage: from 2003 to 2008, with the sustained and high-speed development of China's economy, the bottleneck of infrastructure on the economy is highlighted again. Some ministries and local governments have issued policies and regulations to break the barriers to entry in the field of infrastructure.

In February 2005, several opinions of the State Council on encouraging, supporting and guiding the development of non-public economy such as individual and private sectors (Article 36 of the State Council) authorized by Xinhua news agency to broadcast the full text stressed that non-public capital should be allowed to enter monopoly industries such as electric power, telecommunication, railway, civil aviation and petroleum. Under the stimulation of favorable policies, some domestic cities began to set off a wave of municipal public utilities operation.

The fourth stage: from 2009 to 2013, the world's major economies fell into the downward phase of the economic crisis. The Chinese government issued the four trillion policy, and the urban investment mode led by the land economy and the real estate economy developed rapidly.

In March 2009, the central bank and the China Banking Regulatory Commission jointly proposed: support local governments with conditions to set up investment and financing platforms, issue corporate bonds, medium-term notes and other financing tools, and broaden the financing channels of supporting funds for central government investment projects. In the same year, the number of urban investment bonds issued increased from 11 to 119, reaching 189.63 billion yuan, and the total issuance increased by 1155.83% compared with 2008 [2]. While realizing the V-shaped rebound of GDP, it also foreshadows the future local debt.

The fifth stage: since 2014, the State Council's opinions on strengthening the management of local government debt (GF [2014] No. 43) has revised the budget law to give local governments the function of borrowing, push PPP to the forefront, and the traditional mode of government financing platform begins to retreat. At the same time, various ministries and commissions have issued policy documents to promote the government and social capital cooperation mode, PPP has become a social and economic boom.

（2） International Perspective

Looking back on the history of infrastructure investment and financing in China and comparing with other countries in the world, it can be found that in addition to the differences in political system, countries in the field of public governance are facing similar problems with economic development, and they also have the same solution path.

After World War II, Keynesian government intervention economic theory encountered governance crisis with a series of factors such as economic downturn, increasing fiscal deficit and government trust crisis. How to solve the government failure and market failure and improve the efficiency of public service field has become the new focus of government public management in various countries.

Then, a vigorous new public management movement emerged, aiming at reshaping the government and repositioning the relationship between the government and the market; in the micro field, governments began to promote the private capital into the infrastructure and public service fields which were traditionally dominated by the government.

In the UK, after the privatization of some operational infrastructure, PFI / PF2 is implemented for quasi operational and public welfare public services, while in France across the Straits, franchising is the dominant mode. This is the predecessor of PPP. At first, as an investment and financing mode, PPP solves the investment and financing problems of various countries in the field of public services. With the application and understanding of these model concepts, it has become a concept of optimizing the relationship between the government and the market, improving the supply efficiency of infrastructure and public services, meeting the public demand, and promoting sustainable economic development The people first public private partnership initiated by the Department.

Compared with several countries with relatively mature PPP [3], Britain originated from Thatcher's ruling period, and began to promote the British version of the supply side reform and promote the privatization of local public utilities.

However, this measure failed to completely solve the problems of British economic recession and increasing public expenditure. After taking office, major started to launch the PFI plan in 1990. However, this policy was rarely used. It was not until the Labor Party led by Blair took power in 1997, and the PFI was really widely implemented. Although there is no legislation on PFI in UK, it adopts standardized contract and establishes a perfect operation system. Up to now, although the PFI and the improved PF2 model in the UK have stopped, they have affected the practice and development of many countries.

As early as the 19th century, France adopted the way of franchising to operate infrastructure, including canals, bridges, water supply, power supply and so on. After the 20th century, France has enriched the connotation of government and social cooperation and extended the partnership contract system.

Look at the countries that we are approaching. After Japan's economic bubble burst in 80s and 90s, in order to reduce government expenditure, private capital was first introduced into railways, telecommunications and other fields, then gradually expanded to medical, municipal, prisons, embassies and other fields. On the basis of absorbing the British PFI system, Japan established its own legal system.

South Korea also drew lessons from the British model, promulgated legislation to promote private capital to participate in public investment in 1994, and improved it after the Asian economic crisis to ease the pressure of government direct investment.

In addition to the above-mentioned countries, Germany, Canada, Australia, Turkey, Brazil, Argentina, Thailand, the Philippines, India, Myanmar and South Africa all have PPP practices. Although there are differences in motivation, laws and policies and the degree of development among countries, the promotion concept is similar.

China China one belt, one road to China, one belt, one road to the other countries, and the other countries along the border, which are policy communication, facilities interconnection, trade flow, financing and people's hearts. In the interconnection and interconnection of infrastructure, the developing countries are the main countries in the whole country. The infrastructure is scarce and the government is short of funds. The development space is wide. Meanwhile, the PPP mode has reached the world consensus, which will be China and the other areas. Countries along the way have become useful tools for strengthening cooperation and dialogue in the field of infrastructure.

China has accumulated rich practical experience in PPP field after years of development. By the end of 2019, the number of PPP projects in the Ministry of finance of China has reached 12341, with a total investment of 17.78 trillion. In digital terms, China has become the largest PPP country in the world.

At present, because the PPP law has not yet been promulgated, the legal protection for the cooperation mode between the government and social capital is only at the level of policies and regulations. With the introduction of different regulatory policies, the PPP market has experienced a roller coaster like change. It is gratifying to note that in the past two years, the concept of real PPP and real PPP has been strengthened. These successful and failed experiences provide a practical basis for Chinese enterprises to go abroad in the future.

02

Current situation of infrastructure investment and financing in China

After decades of development, China's infrastructure investment and financing market has formed three major models, which are special debt, PPP and urban investment. The other models evolved from this are not unimportant or occupy a small proportion, but the restrictions of policy supervision and the failure of effective statistics of off balance sheet channel business, which makes it difficult to compare such off balance sheet channel business with the above three models in data But it can't be ignored.

Although the introduction of the infrastructure REITs pilot policy has not changed the overall situation and fundamental logic of China's infrastructure investment and financing, it has caused huge social repercussions, mainly to fill the gap in the field of infrastructure equity investment and open up the primary and secondary markets of infrastructure investment.

In the past 20 years, the rapid development of China's economy has made the industrial strength and financial capital grow. The project operation experience of social capital is rich, and the capital market liquidity is sufficient. Therefore, diversified investment and financing channels are urgently needed at both the industrial and financial sides.

In the capital market, the debt financing system has been quite mature, but equity financing has been limited in the fields of large consumption, TMT (technology, media and communication), high and new technology, and almost blank in the field of infrastructure. The emergence of infrastructure REITs conforms to the common needs of industry and finance, making the infrastructure investment and financing market a flowing and coherent open market, and also makes the current society think more systematically about the market status and development prospects of infrastructure investment and financing.

（1） Special debt model

For the stock part, from 2015 to now, the number and scale of special bonds have been increasing. By the end of 2019, 2751 special bonds with a total of 9.4 trillion were issued by 37 issuers across the country [4]. The application fields of special bonds include land reserve special bonds, toll road special bonds, shed reform special bonds, and innovate and issue various special bonds in different fields; from the perspective of industry investment, shantytowns reconstruction and issuance accounted for 35.93%, land reserve accounted for 33.89%, other administrative toll roads, colleges and Universities, hospitals accounted for 30.18%, shantytown reconstruction and land reserve accounted for 60% Go ahead.

Affected by the epidemic situation this year, in order to stimulate the economy, the government made it clear in March that the special debt in 2020 should not be used in land reserve, shed reform and other real estate related fields, and added emergency medical treatment facilities, public health facilities, and urban old community reconstruction projects.

At that time, the market was in an uproar. Firstly, due to the difficulties in the follow-up financing and repayment of the projects under construction, and secondly, the loans for the land reserve and the shed reform project had been stagnant in the commercial banks after the promulgation of the management measures of the Ministry of Finance on the special bonds for land reserves and the special bonds for the reform of greenhouses.

For the newly added part, this year's government work report proposes to arrange 37500 yuan of special bonds in 2020, an increase of 1.6 trillion yuan over last year, and at the same time, increase the proportion of special bonds that can be used as capital; 600 billion yuan of investment within the central budget, increase the capital of national railway construction by 100 billion yuan; increase the scale of deficit ratio by 1 trillion yuan, and issue 1 trillion yuan of special anti epidemic national debt at the same time, if tax reduction is considered again The cost was reduced by 250 million yuan, nearly 10 trillion yuan.

Of course, the data listed here do not mean that all of them should be invested in infrastructure, but from the data of the first half of the year, infrastructure is one of the most important investment fields.

The project undertakers of special bonds are often local state-owned enterprises and urban investment companies. Among them, the special debt projects in transportation fields such as expressways in economically developed areas have stable cash flow and belong to high-quality assets of local governments.

Therefore, the infrastructure REITs pilot project will be a great benefit for these local state-owned enterprises and urban investment, but whether they are willing to REITs these high-quality assets is also a focus of attention of all social parties.

（2） PPP mode

Compared with special bonds, PPP has not been mentioned in the government work report of the NPC and CPPCC this year, but it is clearly emphasized in the implementation of national economy in 2019 and the draft of national economic plan in 2020 issued by the national development and Reform Commission: continue to increase financial support, give play to the guiding role of government funds, standardize and innovate the cooperation mode between the government and social capital, and support the participation of private capital to fill in the shortcomings and new models Infrastructure construction.

From the policy point of view, the development of China's PPP market has been obvious to all since 2014. With the promulgation of relevant policies by the State Council and various ministries and commissions, most local governments and social capital parties have never understood PPP from everything can be PPP, and then to today's standard PPP, the market development tends to be rational, and the project landing rate continues to increase.

From the financing and refinancing data, as of the end of 2019, there were 12341 projects in the Treasury of the Ministry of finance's PPP comprehensive information platform, 9383 projects in the Library under management, and the financing landing rate was less than 10%; in terms of refinancing, by the end of May 2020, 21 PPP ABS orders had been issued, with a financing amount of 21.558 billion yuan; 4 special PPP bonds were issued, with a financing amount of nearly 4 billion yuan. It can be seen that the financing market has not really opened, and the financing difficulty is one of the important problems restricting the promotion of PPP projects.

In this regard, relevant ministries and commissions have also attracted attention. In February this year, the Ministry of Finance successively upgraded the PPP comprehensive information platform to strengthen the supervision of all parties on the whole life cycle of the project from the perspective of strengthening the information disclosure; it also issued the PPP contract demonstration text in the field of sewage and garbage treatment to strengthen the application in mature fields; in March, it also issued the PPP performance management guidelines, which are the two-way performance evaluation constraints and information for the social capital side and the government side Disclosure and other requirements will help to enhance the understanding and trust of financial institutions for projects, thus contributing to the development of PPP project financing market.

In terms of refinancing market, most of the projects are in the construction stage, so the demand has not been fully reflected. With the increasing number of projects entering the operation period, refinancing, equity trading, PPP REITs and ABS will provide development space for the development of PPP secondary market. For investors with asset operation ability, investment and M & A in the secondary market will be a new business growth point in the future.

From the perspective of innovation and development, this government work report vigorously promotes the construction of two new and one heavy, among which projects that give new impetus to the city, such as smart transportation, smart city and new industrial city, highlight the potential of infrastructure to promote the endogenous development of urban economy.

These innovative industrial comprehensive development projects should have been the strength of social capital. However, combined with PPP, the restrictions on land fund expenditure after CJ [2019] No. 10 document make PPP mode encounter bottlenecks in some parks, industrial new towns and metro projects of TOD mode.

For the local governments that are short of money, they need to seek a breakthrough in the PPP special debt mode, find the self consistent logic of capital balance of land value-added projects, or introduce industrial development economy, and select large enterprises with comprehensive strength for long-term and rolling development, so as to realize self blood production and financial self balance. Under the current policy background, the land control is relatively strict, and this kind of practice is also difficult, but it should be the direction of innovation and reform.

（3） Urban investment mode

Urban investment, also known as the local financing platform, is known as the son of the local government. Since the reform of tax sharing system started in 1994, it has developed rapidly since 2008. It has become an important financing channel for local infrastructure construction. It has contributed an important force to China's economic growth in the past decade, but also pushed up the hidden debt of local government.

The issuance of urban investment bonds started in 2007. With the growth of infrastructure construction demand, the number and scale of issuance increased year by year. Until recent years, due to the control of various policies on government debt and the standardization and marketization transformation of local financing platforms, the total amount of new bonds issued by urban investment was almost equal to the amount of mature urban investment bonds [6].

On July 23, 2018, Premier Li Keqiang proposed in the executive meeting of the State Council that financial institutions should be guided to ensure the reasonable financing needs of financing platform companies, thus relieving the debt risk of the urban investment company to a certain extent. Then, the bond issuance of the city investment company rose again. In 2019, the total number of urban investment bonds issued was 4098, with an issue amount of 3390.572 billion yuan, a 10-year high.

This can be divided into two aspects: one is that the maturity of urban investment bonds issued in 2014-2016 is mainly concentrated in 4-5 years, with a large proportion of maturity replacement; the other is that in 2018, under the background of the decline in infrastructure investment growth, special bonds are subject to total quota control, and PPP is regulated by policies in 2018, so urban investment has to continue to play the role of local construction investment and financing to fill the investment gap.

Especially this year, in order to combat the impact of the new epidemic, the local government in order to speed up the pace of investment, in addition to issuing special bonds, both the issuance and net financing volume of urban investment bonds have increased significantly compared with the same period

（4） Infrastructure investment, special debt, PPP, urban investment and REITs

After understanding the above three major financing modes of China's infrastructure, it seems to understand the main modes of infrastructure investment in China as a whole. However, by comparing the data of the three and the overall data of infrastructure investment, we can see that these three mainstream methods can not fully cover the total investment in infrastructure in China.

There are several reasons. First of all, the above data are statistical data. Among them, the transaction data of special bonds and PPP are relatively open. However, in the early period of promoting PPP, a certain proportion of PPPs were not in the Treasury of the Ministry of finance, especially the urban investment bonds were only public issuance data, and a large number of non-standard business data such as asset management and trust were not included;

Secondly, for some large-scale national key construction projects, such as the Yangtze River protection project, the south to North Water Diversion Project and the next Yellow River protection project, the state direct investment or the joint investment mode of the state and the local government should be adopted;

At the same time, as far as the three modes are concerned, the special debt and PPP mode are limited by the budget space of the local government. On the surface, the urban investment bonds rely on the enterprises themselves, but the actual situation is inseparable from the local economic development. The issuance of bonds is limited by the debt leverage of enterprises themselves and local governments. Therefore, in order to strengthen the infrastructure construction of local governments, many projects adopt F EPC mode, using the credit qualification of large contractors to raise funds for local government projects.

Although there are some problems, such as playing side-by-side with the policy and even violating the regulations, there is a certain market space. Especially after the promulgation of the No.10 document, the land-based fund budget can not be included in PPP projects. The local government should not only attract industry service providers and contractors with comprehensive strength, but also lack of financial funds to carry out the rolling development with the help of the strength of social capital It is an innovation mode.

According to the data, the total amount of infrastructure investment in China has reached 113 trillion yuan in the past decade. According to the statistics of the national development and Reform Commission, the cumulative infrastructure investment from 1995 to 2018 is 130 trillion yuan, with an average annual growth rate of 18%. So far, the total investment of one billion yuan has already precipitated into a huge stock market.

In recent years, both the government and the local government are the main sources of debt, such as the former construction enterprises. Especially in the past two years, the number of non-standard default events of urban investment company has been increasing, which reveals that some local government debt situation is relatively serious.

According to public data statistics, there are 49 urban investment platforms with non-standard default from 2018 to 2019, including 20 platforms in Guizhou Province. The risk events of urban investment companies have exposed the deterioration of local government investment and financing environment to some extent.

In this context, the government needs a lot of investment support to increase the investment in new infrastructure and strengthen the construction of three aspects and one new. Therefore, it is of great significance to explore the existing assets. By Invigorating the stock assets, reducing debt leverage and resolving government risks, it also absorbs a wider range of social investors, and releases new additions and reduces investment pressure at the same time.

At the just concluded Lujiazui financial forum, Guo Shuqing, chairman of the CBRC, mentioned that China's savings account for more than a quarter of the world's total, contributing a lot of surplus funds to world economic growth. Then, for China's capital market, the introduction of REITs also promotes the transformation of public savings and investment, and is directly from the public to the real economy, reducing the intermediate link, which is expected to reduce the financing cost.

As for the combination of REITs and PPP, the community has high expectations. There is no precedent for infrastructure REITs in the market. The national development and Reform Commission and the China Securities Regulatory Commission have also made it clear that the issuance of REITs is not in a hurry to achieve success. The mature issuance of REITs is conducive to the expansion of pilot areas and the promotion of specific projects. Therefore, the discussion in this paper can be used as a reference for reading For reference, I will not repeat them here.

03

The next step of infrastructure investment and financing development and innovation

Looking forward to China's infrastructure investment and financing innovation, we should closely integrate with the current economic environment. In order to grasp the six stabilities, promote the six guarantees and revitalize the economy, relevant ministries and commissions have recently issued a series of fiscal and monetary policies under the unified deployment of the financial commission of the State Council, saying that this is neither the last supper nor free lunch.

In short, both for the present and for the future. When giving lectures to local governments and social capital parties, the author often applies this concept to the field of PPP. Both the government and the enterprises should follow the win-win principle of long-term cooperation, complementary advantages, shared risks and shared interests to do PPP. Otherwise, both sides will lose and the public and other parties will be affected.

The competition among big countries depends on science and technology for a long time, and the development of science and technology is not overnight. The proposal of new infrastructure has drawn a directional blueprint for medium and long-term development. There are many articles on new infrastructure in the market. The new fields, new models and new ideas are different from the traditional ideas of developing infrastructure.

But in the final analysis, it is the more reasonable and scientific allocation of production factors, which strengthens the endogenous power for economic development and empowers urban development. However, PPP and social cooperation are not the only focus on PPP and social projects. The new infrastructure no longer emphasizes the government as the leading role, but also the optimization of the government governance level, so as to derive diversified investment and financing channels.

The first is the comprehensive application of the existing model. Special bonds, PPP and urban investment appear in China's economic stage in different periods, and are emphasized or regulated in different periods of time. They have their own specific social background. For example, in order to speed up the economic construction after the epidemic, we should speed up the issuance of special bonds. In special periods, there should be special policies, and the short-term and long-term development should be balanced, so that sustainable development is easy.

In recent years, the development of urban investment company has been greatly affected by policies, but the relationship between urban investment company and local government is naturally close. It has natural advantages in undertaking special debt projects of local government and implementing development measures of local government. In particular, some urban investment companies have become bigger and stronger after nearly ten years of development and become an important support for local economy. But if we return to the mode of urban investment, the invisible debt of local government will be immeasurable, which may cause systemic debt risk.

PPP mode is widely used by countries all over the world. If the application standard is verified, it is an effective mode to reasonably improve the service efficiency of local government infrastructure and alleviate local government debt. PPP will continue to be adopted and promoted, but not everything can be PPP. The proportion of mature countries applied is not more than 10-20%. In the future, China will also be within a certain proportion, such as 30%.

The three models are not zero sum game. They can give full play to their respective advantages and support each other to jointly promote the sustainable development of local economy.

Secondly, with regard to the development of new towns and the comprehensive development of industrial parks, how to carry out investment and financing innovation under the existing policy constraints is an important direction.

As mentioned above, the development of new infrastructure, new town development and industrial park can often gather advanced production factors such as human, financial and material, especially science and technology and big data. However, the development and construction of such projects involves huge funds, numerous elements and complex structure, so it is necessary to have a strategic vision to attract investment. Only relying on local land finance to issue special debt and lack of industrial layout will have limited marginal effect on local economic growth, which is not the strength of local government.